Mounting class actions and an increase in power for the corporate watchdog are placing serious financial strain on companies as their directors and officers (D&O) insurance policies are pushed to the limit.
A recent survey of top D&O insurance providers, carried out by law firm Colin Biggers & Paisley (CBP), found that 60 per cent of respondents have seen the number of claims and notifications against their D&O policies at least double in the years following the global financial crisis (GFC).
According to the survey, the pressure is not going to be alleviated any time soon, with 60 per cent of respondents predicting that over the next 12 months, class actions would be the main challenge for D&O policies, followed by greater enforcement action from regulators such as ASIC (20 per cent) and a rise in liquidator actions (8 per cent).
"The corporate collapses from the GFC created a perfect storm of shareholder, creditor and regulator outrage," said Greg Skehan, a senior partner in CBP's insurance group.
"We've seen a big upsurge in legal actions against companies and directors as investors and liquidators galvanise to recover their losses, and ASIC mobilises to crack down on 'so-called' corporate crooks."
As a result, Skehan said insurance is being called upon to cover a greater number of claims involving higher aggregate payouts.
"It's no wonder many policies are being squeezed, particularly in the area of payout limits," he said.
According to the survey, 20 per cent of respondents said the insured's D&O policy did not fully cover their costs in up to 25 per cent of claims, while 10 per cent of respondents indicated the policy was not sufficient to cover costs in 25 to 50 per cent of cases.
Skehan noted that while the system was not yet at breaking point, given that 70 per cent of respondents reported that an insured's claim costs were generally fully covered, he said there were clear signs cracks were developing.
"Policy limits have been reduced in recent times, with 44 per cent of survey respondents saying this was the most significant change made to their D&O policies in the past 12 months - so naturally, many directors and executives are feeling the pinch," he said.
The survey revealed that 75 per cent of respondents offer policy limits of $30 million or less, but 22 per cent were settling class action claims for an average of $50 to $100.
"Clearly then, where 'big ticket' class actions are concerned, D&O protection can be highly illusory," said Skehan.
Another significant area where directors are being forced to cough up is investigation costs, which Skehan sees as a bi-product of ASIC significantly "upping the ante" on enforcement action in recent times.
Eighty per cent of respondents said they had observed an increase in claims for investigation costs, while 50 per cent reported that current sub-limits for this category of costs were not sufficient to fully cover claimants' needs.
"ASIC has not held back in using its powers to compel corporates to produce information and attend extensive interviews in recent years. Summonses often go out to multiple directors and executives, which only increases the time and costs, as every individual called up needs to have capable legal representation," said Skehan.
"The regulator's more active investigative role has meant that limits for representation costs are being eroded at a very early stage so there's often little left in reserve for when proceedings develop into serious litigation later down the track."
Skehan also noted that, as the Commonwealth Senate Economics Committee had recently backed the expansion of ASIC's coercive powers, subject only to better disclosure of their use, companies should expect the regulator to be buoyed by the government's approval of its practices.
"ASIC has consciously adopted an assertive posture for deterrence purposes, and following the government's recent vote of confidence, we anticipate the regulator will keep up its zealous enforcement," he said.
"Companies at risk of incurring substantial investigation and representation costs should therefore consider negotiating more accommodating policy limits with their insurers and be prepared to pay a higher premium for those benefits."